Archive for month: May, 2012

In my seminars and webinars around the US I frequently refer to the community bank inferiority complex. Many community banks feel that their compliance programs are not as good as programs at larger banks. My response to these laments is to point out that the primary difference between a community bank compliance program and the compliance program at a larger bank is that the larger banks tend to make larger mistakes.

There is a never ending stream of proof that supports my claim. Just look at a couple of recent fair lending actions involving large banks and the Department of Justice (DOJ).

In December, Bank of America agreed to pay a record $335 million to compensate borrowers of Countrywide Financial Corp. who were charged more for home loans based on race and national origin.

Earlier today (May 31, 2012) SunTrust Mortgage Inc., the mortgage lending subsidiary of the nation’s 11th-largest commercial bank, agreed to pay $21 million to resolve a lawsuit by the Department of Justice that it engaged in a pattern or practice of discrimination that increased loan prices for many of the qualified African-American and Hispanic borrowers who obtained loans between 2005 and 2009 through SunTrust Mortgage’s regional retail offices and national network of mortgage brokers.

Both big banks were charged with engaging in the same form of discrimination. Could a community bank have the same problem? – Certainly. Would the amount of the settlement be as large? – Not in a million years.

Big banks and big mistakes is a combination that continues to reveal itself. Bigger isn’t necessarily better, it is just bigger.

So who is the next big bank in the sights of DOJ? Rumor has it that the largest mortgage lender in the US, Wells Fargo & Co., could be next.

On May 23, 2012, the Consumer Financial Protection Bureau (CFPB) took the first step toward adopting consumer protections for the fast-growing prepaid card market. The Bureau’s Advance Notice of Proposed Rulemaking seeks input on how to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent.

The Bureau’s rulemaking will focus on “General Purpose Reloadable” prepaid cards which allow consumers to load the cards with money upfront and use them as if they were checking account debit cards. Much of the growth in the prepaid market is coming from consumers who are using the prepaid card as an alternative to a checking account.

Despite its growth, the prepaid market is still largely unregulated at the federal level. With today’s Advance Notice of Proposed Rulemaking, the Bureau plans to evaluate several topics:

Fees and Terms Disclosure: The lack of an industry-wide standard on prepaid card fee disclosure may make it difficult for consumers to understand the cost of the product or compare fees. Often, consumers do not know what protections or fees come along with their prepaid cards prior to purchase because such disclosures are contained inside the packaging. Consumers need to be able to comparison shop in order to make well-informed decisions. The Bureau will evaluate the best way to balance the need for disclosure with the fact that many cards are purchased at retail locations and space for disclosures is limited. Consumers should also know whether or not their funds are protected by FDIC insurance. The Bureau plans to evaluate how prepaid card issuers should disclose the insurance status of cardholders’ funds.

Unauthorized Transactions: Federal regulations require that credit and debit card issuers limit consumers’ liability when their cards are used without their authorization. These regulations do not extend to prepaid cards. Many prepaid card issuers voluntarily offer this protection, but it is not standard across the industry. The Bureau will evaluate the costs and benefits of card issuers providing limited liability protection from unauthorized transactions.

Product Features: Most prepaid cards do not offer any credit features. In general, cardholders may not be able to withdraw or spend more than the funds loaded on their cards. However, some prepaid cards allow their cardholders to overdraw their accounts, and some offer small-dollar loans or a line of credit. Similarly, very few prepaid cards have a savings account. Even though such savings accounts typically have high interest rates, consumers do not seem to take advantage of the opportunity to save. Another feature is that of credit repair, which claims to offer consumers the opportunity to improve or build credit. The Bureau is looking for public input on the costs, benefits, and consumer protection issues related to those product features.

In a recent case the FDIC claimed a bank violated ECOA and Regulation B by engaging in a pattern or practice of denying applications for a credit card based on an initial match of applicant names to the Office of Foreign Asset Control’s list of Specially Designated Nationals (“SDNs”) without further verification that the applicants were in fact SDNs, which resulted in a disparate impact upon Hispanic applicants. The bank agreed to pay a civil monetary penalty (CMP) of $190,000.

As is usually the case, regulators found no evidence of hate-based discrimination. The cause of the problem appears to be the old “lazy banker syndrome.” This syndrome appears often in connection with credit cards. A marketing program results in a big stack of applications. To reduce the stack to a manageable level, quick cuts are made, such as, if the applicant appears on the SDN list they are removed from consideration. In any culture certain names are more common than others, such as Bill Smith. It does not take a lot of work to determine if the individual on the SDN list is same individual on the credit application; but some effort is required.

On May 9, 2012 the Consumer Financial Protection Bureau (CFPB) outlined rules it is considering that would simplify (or strangle) mortgage points and fees. These rules, which the CFPB expects to propose this summer and finalize by January 2013, would make it easier for consumers to understand mortgage costs and compare loans so they can choose the best deal.

The CFPB is considering proposals, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which would:

Require an interest-rate reduction when consumers elect to pay discount points. Discount points are a fee, expressed as a percentage of the loan amount, to be paid by the consumer to the creditor at the time of loan origination in return for a lower interest rate. Discount points can benefit consumers by allowing them to reduce their monthly loan payments. The CFPB is considering proposals to require that any discount point must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point.

Require lenders to offer consumers a no-discount-point loan option. It is often difficult for consumers to compare loan offers that have different combinations of points, fees, and interest rates. Under the proposal, consumers must also be offered a no-discount-point loan. This would enable the homebuyer to better compare competing offers from different lenders.

Ban origination charges that vary with the size of the loan. Brokerage firms and creditors would no longer be allowed to charge origination fees that vary with the size of the loan. These “origination points” are easily confused with discount points. Instead, under the rules the CFPB is considering, brokerage firms and creditors would be allowed to charge only flat origination fees.

Set qualification and screening standards. Under state law and the federal Secure and Fair Enforcement Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is considering rules to implement Dodd-Frank requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable. All loan originators would be:

Subject to the same standards for character, fitness, and financial responsibility;

Screened for felony convictions; and

Required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.

Prohibit paying steering incentives to mortgage loan originators. In 2010, the Federal Reserve Board issued a rule that prohibits loan originators from directing consumers into higher priced loans because they could earn more money. The Dodd-Frank Act requires the CFPB to issue rules as well. The proposals the CFPB is considering would reaffirm the Board’s rule, which bans the practice of varying loan originator compensation based on interest rates or certain other loan terms. The CFPB’s proposal would also clarify certain issues in the existing rule that have created industry confusion.

It is going to be a busy summer. If the CFPB issues the proposals, as discussed above, expenses will increase (training for MLOs for example) and revenue will be cut (points). We all need to watch for the proposals, study them diligently when they are released, and submit thoughtful comment letters in response. The industry is changing rapidly.

For more information click here to access a detailed 37-page review of the proposal. It’s the sixth link down titled “Small Business Review Panel for Residential Mortgage Loan Origination Standards Rulemaking.”

Section 1026.41(f) of Regulation Z states, “The creditor and its agents shall compensate a fee appraiser for performing appraisal services at a rate that is customary and reasonable for comparable appraisal services performed in the geographic market of the property being appraised.” To assure the appraisal fee is “customary and reasonable” the creditor may either conduct its own appraiser survey or obtain a survey from a third party.

In the past, several companies offer their appraiser surveys for no change, in the hope that banks would in turn subscribe to other services. Some of those companies are no longer offering the free surveys. So, your options include finding a new free source, pay for a survey, or conduct your own survey.

On April 13th the Consumer Financial Protection Bureau (CFPB) released a bulletin clarifying that financial institutions may be held responsible for the actions of the companies with which they contract. The other federal bank regulatory agencies have held the same position for years.

Banks and nonbanks contract with service providers for a number of reasons. They may use service providers to develop and market additional products or services or to provide expertise. Banks may also contract with outside vendors for services they may not have the resources to conduct independently, such as telemarketing or call center services.

Using outside vendors can pose additional risks. A service provider that is unfamiliar with consumer financial protection laws or has weak internal controls can harm consumers. The agencies want to ensure that consumers are protected from irresponsible service providers and that banks are contracting with honest third parties.

The agencies expect supervised financial institutions to have an effective process for managing the risks of service provider relationships. The CFPB recommends that supervised financial institutions take steps to ensure that business arrangements with service providers do not present unwarranted risks to consumers. These steps include:

Conducting thorough due diligence to verify that the service provider understands and is capable of complying with the law;

Requesting and reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;

Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;

Establishing internal controls and on-going monitoring to determine whether the service provider is complying with the law; and

Taking prompt action to address fully any problems identified through the monitoring process.

It is not that often that a new federal financial institution regulatory agency is created, but when it happens one can only hope for something better than what existed before. But the Consumer Financial Protection Bureau (CFPB) continues to disappoint.

The latest disappointment is relatively minor. In their regulatory agenda published last fall the CFPB stated that final rules revising Regulation Z provisions dealing with the borrower’s ability to repay would be published in April 2012. Well, April has come and gone and still no final regulations.

Our biggest concern is the quality of the regulations the CFPB eventually publishes. But do quality and timely delivery have to be mutually exclusive? I have been a witness to 36 years of missed regulatory deadlines. I hoped the CFPB would be better at meeting their own deadlines than their predecessors.

The regulations should be published soon. We have a mountain of Truth in Lending revisions coming – this first piece was scheduled for April, three more pieces are scheduled for July, and another piece for October.

I am not minimizing the challenge that the CFPB has before it; the revisions to Regulation Z are massive. But once a project gets behind schedule it is hard to catch up. Missed deadlines are an honored tradition among federal financial institution regulators. The same old story continues.